We thank Fred Celimene, Kinvi Logossah, and Nicolas Sanz for very substantial help in running Experiment 1, Hela Maafi, Marie-Pierre Dargnies and Omar Sene for their help with Experiment 2, Olivier Armantier, Michèle Cohen, Guillaume Frechette, Ori Heffetz, John List, Andreas Ortmann, Paul Pezanis, Hilke Plassmann, Charles Plott, Drazen Prelec, Andy Schotter, Jason Shogren, Jean-Marc Tallon, Jean-Christophe Vergnaud, Leeat Yariv, four anonymous referees, a co-editor, and seminar participants at Westminster Business School, La Sorbonne, University of Rennes, University of Strasbourg, New York University, Royal Holloway, The Paris School of Economics, and the LSE, as well as the ESEM in Milan, the ESA meetings in Lyon and at Caltech, and the third Nordic Conference in Experimental and Behavioral Economics in Copenhagen for helpful comments. We are also grateful to Jean-Robert Tyran for his valuable input at an early stage of the project. This work was done while Dirk Engelmann was a member of the Department of Economics at Royal Holloway, University of London. Engelmann thanks Royal Holloway for supporting this research. Engelmann also acknowledges financial support from the institutional research grant AV0Z70850503 of the Economics Institute of the Academy of Sciences of the Czech Republic, v.v.i.
Reconsidering the Effect of Market Experience on the “Endowment Effect”
Article first published online: 3 DEC 2010
© 2010 The Econometric Society
Volume 78, Issue 6, pages 2005–2019, November 2010
How to Cite
Engelmann, D. and Hollard, G. (2010), Reconsidering the Effect of Market Experience on the “Endowment Effect”. Econometrica, 78: 2005–2019. doi: 10.3982/ECTA8424
- Issue published online: 3 DEC 2010
- Article first published online: 3 DEC 2010
- Manuscript received February, 2009; final revision received June, 2010.
- Endowment effect;
- exchange asymmetry;
- market experience
Simple exchange experiments have revealed that participants trade their endowment less frequently than standard demand theory would predict. List (2003a) found that the most experienced dealers acting in a well functioning market are not subject to this exchange asymmetry, suggesting that a significant amount of market experience is required to overcome it. To understand this market-experience effect, we introduce a distinction between two types of uncertainty—choice uncertainty and trade uncertainty—both of which could lead to exchange asymmetry. We conjecture that trade uncertainty is most important for exchange asymmetry. To test this conjecture, we design an experiment where the two treatments impact differently on trade uncertainty, while controlling for choice uncertainty. Supporting our conjecture, we find that “forcing” subjects to give away their endowment in a series of exchanges eliminates exchange asymmetry in a subsequent test. We discuss why markets might not provide sufficient incentives for learning to overcome exchange asymmetry.